Making the case for a strong and independent Fed

The cornerstone of the Federal Reserve's role in our system is to control inflation, and putting such decisions under the influence of politicians must be avoided at all costs.

By Daniel JonesSpecial to the Star-Banner

The financial crisis of 2008 saw an unprecedented response by the federal government, and mainly the Federal Reserve. Hundreds of billions of taxpayer dollars were pumped into the system in the form of bailouts for the largest financial institutions, and for the first time in its history, the Fed cut interest rates to zero in an attempt to flood the system with cash. When these actions fell short of halting the credit crunch, the Fed devised other programs to spur lending and increase trust among banks, more than doubling the size of their holdings of U.S. government and mortgage-related bonds to over $2 trillion dollars.As we enter a new year, our economy and the financial system are beginning to show signs of stabilization, suggesting that the worst is behind us. However, the outrage over the billions in bailouts has never subsided, and Ben Bernanke and the Fed have become Congress' newest election-year punching bag.Legislation currently before the House and Senate would severely limit the powers of the Fed, by opening their policies to congressional review and influence, in addition to restricting their role solely to the establishment of interest rates. While limiting the powers of the Fed is popular among their constituents, for Congress to do so would likely have dire consequences in the future.In the House, U.S. Rep. Ron Paul, R-Texas, has introduced legislation that would subject Fed decisions on interest rate policy to congressional review. In short, if Congress does not like a decision to raise rates - as it's unlikely one can imagine a situation in which they would be unhappy about lower rates - then it can order a review of the decision, forcing the Fed to explain its rationale and, in turn, create undue influence in future decisions that may prove unpopular. Shortsighted politicians will, of course, always prefer lower rates, as the economic growth they create would be popular back home, regardless of the longer-term risks to inflation that can come as a result.The cornerstone of the Fed's role in our system is to control inflation, and putting such decisions under the influence of politicians must be avoided at all costs.In addition to the legislation before the House, the Senate is also considering a proposal by Sen. Christopher Dodd, D-Conn., that would strip the Fed of its role in the regulation of banks, and limit the Fed's power solely to the establishment of interest rates. In so doing, the bill would create a "super regulator" that would oversee banks and other financial institutions.During the recent financial crisis, many agree that it was the Fed's ability to swiftly react that prevented the entire system from collapsing on itself. While its decisions to bail out several Wall Street firms is hugely unpopular, and deservedly so, to place these decisions in the hands of a politically appointed bureaucratic board would be ineffective when the next crisis arises. Let there be no mistake, there will be another crisis, and the fact that our system is intact and functioning today is a testament to the overwhelming and timely response by the Federal Reserve.To demonstrate the potential impact of this proposal, one should look no further than Congress' contribution to the financial crisis: TARP. Faced with the collapse of our system, the Treasury Department first requested the $700 billion program on Sept. 20, 2008. By the time Congress finally approved the bill on Oct. 3, the Dow Jones Industrial average lost approximately 10 percent of its value, in addition to the collapse of Washington Mutual and Wachovia. The passage of the TARP program was hailed as being done in "record time," but in times of crisis, it's clear that relying on Capitol Hill to save our system is an unwise option at best.The Senate is considering President Obama's reappointment of Ben Bernanke as chairman of the Federal Reserve. A scholar of the Great Depression, Mr. Bernanke's leadership during the financial crisis, as well as that of Tim Geithner and Hank Paulson, prevented an unthinkable collapse of our system, and a repeat of that dark period in our country's history. For sure, there is plenty of blame to lay at the feet of the Federal Reserve for what caused the financial crisis, but for Congress to toss out our current system in favor of one that essentially puts themselves in the driver seat of our economy would prove unwise. Oversight of our financial system and the ability to step in during times of crisis must remain in the hands of a strong, independent Federal Reserve.Daniel Jones is am a lifelong resident of Ocala and a graduate in finance from the University of Central Florida College of Business.

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